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Premier Li Keqiang speaks during the opening session of the National People's Congress at the Great Hall of the People in Beijing on Monday. Photo: Reuters

Beijing pledges more tax cuts ... but are they enough to jump-start China’s economy? Business heavyweights aren’t convinced

Premier Li Keqiang told parliamentary gathering on Sunday that corporate tax burden would go down by 350 billion yuan

Beijing says it has already cut taxes and will continue to do so in 2017 - but the country’s entrepreneurs are asking the government to do more.

Premier Li Keqiang said in his annual government work report delivered to the country’s parliamentary gathering on Sunday that Beijing would cut the corporate tax burden by 350 billion yuan (US$50 billion) and slash administrative fees by 200 billion yuan in 2017. Li claimed that taxes were cut by 570 billion yuan in 2016.

However, Beijing’s plan did not involve any broad tax-rate cuts, unlike US President Donald Trump’s promise to slash the corporate rate from 35 per cent to 15 per cent. Also, China’s tax cuts cannot be verified independently. While the government insists it cut taxes last year, Beijing’s own numbers show that revenues grew 4.3 per cent to 13 trillion yuan, or about 10,000 yuan per capita on average.

The combined business tax and value-added-tax (VAT) revenues were 5.22 trillion yuan in 2016, against a total of 5.04 trillion yuan in 2015, showing that there was no overall tax cut as a result of Beijing’s VAT reform.

Wang Wenbiao, the vice chairman of the All-China Federation of Industry and Commerce and chairman of Elion Resources Group, said the promised tax cuts, if realised, would be “a bonus for Chinese enterprises”.

“Small and medium-sized firms have longed for tax cuts,” he said.

Zong Qinghou, the chairman of soft drink giant Wahaha Group, said “China still has room for further tax cuts”.

The outspoken billionaire and lawmaker complained publicly at the end of last year that his company paid more than 500 different kinds of taxes or fees annually. And many business leaders have complained about “killer taxes”, a term used by Professor Li Weiguang to describe China’s macro tax burden of nearly 40 per cent.

According to Li Keqiang’s work report, there will be two main tax cuts this year.

In one, if a firm can prove to the government that it had pretax profits of less than 500,000 yuan, instead of the previous 300,000 yuan, its corporate income tax will be halved. In the other measure, if a company is officially recognised by tax authorities as a “technology firm”, it can use 75 per cent of its research and development spending, up from 50 per cent before, as a tax deduction.

The effectiveness of the government’s strategy of structural tax cuts, rather than full-scale reductions, has long been questioned.

Beijing says VAT reform saw more than 500 billion yuan of taxes cut last year, but a survey by the privately run Unirule Institute of Economics found that 87 per cent of entrepreneurs responding felt overburdened.

“The tax burden should not be that high in a downward economic situation,” said Liu Yonghao, chairman of New Hope Group, China’s largest animal feed group.

Chinese manufacturers are calling for a lowering of VAT rates, the highest of which stands at 17 per cent, as they face rising labour costs and a weakening of international competitiveness.

China’s auto glass “king” Cao Dewang has said that everything in China except labour was more expensive than in the United States.

Although Premier Li mentioned changing the four-tier VAT system to one with three tiers, many believe that this would merely merge the two tiers with rates of 13 per cent and 11 per cent.

China has refrained from making significant tax cuts in the face of heavy expenditures, including payrolls for millions of public servants, pensions for farmers and its health-care scheme.

Beijing revised the country’s corporate income tax law last month, allowing more deductions for charitable donations, but kept the standard rate unchanged at 25 per cent.

It has no immediate plan to change the current tax system, which collects over 90 per cent of its revenue from enterprises, to a direct tax mechanism getting more money from individuals via income, consumption and property taxes.

This article appeared in the South China Morning Post print edition as: Beijing vows to reform taxes, but entrepreneurs scepticalPremier vows to reform tax code, but business community is sceptical
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